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XL Capital Ltd Reports Third Quarter 2003 Results



Net Income $99.0 million, or $0.71 per ordinary share

HAMILTON, BERMUDA, October 29, 2003 -- XL Capital Group Ltd (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended September 30, 2003 of $99.0 million, or $0.71 per ordinary share. This result includes the impact of a previously announced $184 million pre-tax ($160 million after-tax) charge for adverse development primarily due to newly reported casualty reinsurance claims for the 1997 to 2000 underwriting years. Net income for the prior year was $184.1 million, or $1.34 per ordinary share, in the third quarter of 2002. ‘Net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ for the third quarter of 2003 was $124.1 million, or $0.90 per ordinary share, compared with $216.6 million, or $1.58 per ordinary share, for the quarter ended September 30, 2002. ‘Net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ is a non-GAAP measure. See below for a reconciliation of this measure to net income available to ordinary shareholders.

Commenting on the third quarter 2003 results, Brian M. O’Hara, President and Chief Executive Officer of XL, stated, “We had strong current underwriting year results in all three of our business segments, despite the previously announced $184 million pre tax charge we took in our North American casualty reinsurance operations in the quarter. Absent this charge, our combined ratio was 87%, which demonstrates the quality underwriting currently being carried out in today’s favorable market environment.”

For the nine months ended September 30, 2003, net income available to ordinary shareholders was $686.5 million, or $4.97 per ordinary share, compared with $181.8 million, or $1.32 per ordinary share, in the nine months ended September 30, 2002 which included $200 million related to the development of September 11th event and $239.1 million in net realized losses on investments. ‘Net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ for the nine months ended September 30, 2003 was $642.9 million, or $4.65 per ordinary share, compared with $450.6 million, or $3.28 per ordinary share, for the nine months ended September 30, 2002. See below for the reconciliation of ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ to net income available to ordinary shareholders.

Total assets as of September 30, 2003 were $39.6 billion compared with $35.6 billion as of December 31, 2002. Book value per ordinary share as at September 30, 2003 was $50.15 compared with $44.48 as at December 31, 2002.

Summary unaudited consolidated financial data for the quarter and nine months ended September 30, 2003 and 2002, respectively, are set forth below (in millions, except per share amounts):


                                       Three months ended  Nine months ended
                                          September 30        September 30
                                          (Unaudited)         (Unaudited)
                                         2003      2002      2003      2002

  Gross premiums written             $2,289.2  $2,647.7  $7,473.6  $6,990.7
  Net premiums written                1,717.8   2,116.1   5,778.8   5,413.6

  Net premiums earned - General
   operations                         1,663.7   1,344.7   4,565.1   3,391.9
  Net premiums earned - Life and
   annuity operations                    86.4     786.4     249.7     836.1
  Net premiums earned - Financial
   operations                            35.3      16.9      98.1      42.3

  Net income                           $109.1    $186.5    $716.7    $184.2
  Preference dividend                   (10.1)     (2.4)    (30.2)     (2.4)
  Net income available to ordinary
   shareholders                         $99.0    $184.1    $686.5    $181.8

  Per ordinary share results:
  Net income available to ordinary
   shareholders                         $0.71     $1.34     $4.97     $1.32

Gross premiums written for general operations in the third quarter of 2003 were $2.1 billion compared with $1.8 billion in the third quarter of 2002. Net premiums written increased to $1.5 billion from $1.3 billion and net premiums earned rose to $1.7 billion from $1.3 billion in the respective quarters of 2003 and 2002. For the nine months ended September 30, 2003, gross premiums written for general operations were $7.0 billion compared with $6.0 billion in the year ago period. Net premiums written for the first nine months of 2003 were $5.3 billion compared with $4.5 billion a year ago. Net premiums earned were $4.6 billion for the first nine months of 2003 as compared with $3.4 billion for the first nine months of 2002.

Gross premiums written for life and annuity operations in the third quarter of 2003 were $89.0 million compared with $793.1 million in the third quarter of 2002, which included a large life reinsurance contract that contributed approximately $760 million in premiums. Net premiums written for life and annuity operations in the third quarter of 2003 were $84.3 million compared with $787.5 million in the third quarter of 2002 and net premiums earned were $86.4 million in the third quarter of 2003 compared with $786.4 million in the third quarter of 2002. For the nine months ended September 30, 2003, gross premiums written for life operations were $276.2 million compared with $851.6 million in the year ago period. Net premiums written were $245.3 million in the first nine months of 2003 compared with $836.0 million in the first nine months of 2002. Net premiums earned were $249.7 million and $836.1 million in the respective nine month periods of 2003 and 2002.

Gross premiums written for financial operations in the third quarter of 2003 were $91.6 million compared with $42.9 million in the third quarter of 2002. Net premiums written for financial operations in the third quarter of 2003 were $89.6 million compared with $26.2 million in the third quarter of 2002 and net premiums earned were $35.3 million in the third quarter of 2003 compared with $16.9 million in the third quarter of 2002. For the first nine months of 2003 gross premiums written for financial operations were $242.7 million compared with $145.0 million in the year ago period. Net premiums written for financial operations were $238.0 million in the first nine months of 2003 compared with $123.3 million in 2002 and net premiums earned were $98.1 million and $42.3 million in the respective nine month periods of 2003 and 2002.

Net investment income from general operations was $142.2 million in the third quarter of 2003, compared with $153.3 million in 2002’s third quarter. Net investment income from life and annuity and financial operations was $48.6 million in the third quarter of 2003 compared with $34.1 million for the quarter ended September 30, 2002. For the first nine months of 2003 net investment income from general operations was $436.3 million compared with $454.2 million in the year ago period. Net investment income from life and annuity and financial operations was $137.0 million in the first nine months of 2003 compared with $79.0 million for the first nine months of 2002.

The Company’s equity in the net income of its investment affiliates for the third quarter of 2003 was $26.2 million versus a loss of $2.0 million in the third quarter of 2002. The Company’s equity in net income of its insurance and financial affiliates was $12.1 million in the third quarter of 2003 versus a loss of $0.4 million in the third quarter of 2002. The Company’s equity in the net income of its investment affiliates for the first nine months of 2003 was $87.3 million versus $38.1 million in the first nine months of 2002. The Company’s equity in net loss of its insurance and financial affiliates was $12.5 million in the first nine months of 2003 versus net income of $0.1 million in the first nine months of 2002.

The combined ratio for the Company’s general insurance and reinsurance operations was 98.0% in the third quarter of 2003, versus 90.9% in the third quarter of 2002. The loss ratios were 70.3% and 61.6% in the quarters ended September 30, 2003 and 2002, with corresponding expense ratios of 27.7% and 29.3% for the same quarters, respectively. The combined ratio for the Company’s general insurance and reinsurance operations was 92.4% in the first nine months of 2003, versus 96.9% in the first nine months of 2002. The loss ratios were 65.1% and 67.5% in the nine months ended September 30, 2003 and 2002, with corresponding expense ratios of 27.3% and 29.4% for the same periods, respectively. In the quarter and nine months ended September 30, 2003, the Company’s results were impacted by adverse development for North American casualty reinsurance losses. In the nine months ended September 30, 2002, the Company’s results were impacted by adverse development for the September 11 event. The combined ratio excluding the third quarter 2003 casualty losses for the quarter was 86.9% and for the nine months ending September 2003 was 87.7%. For the nine months ending September 2002 excluding the September 11th event loss the combined ratio was 91%.

A live on-line web cast of XL’s call with analysts and investors to review the third quarter 2003 results will be held at 10 a.m. Eastern Time on October 30, 2003 at www.xlgroup.com. An unaudited financial information supplement relating to the Company’s 2003 and 2002 quarterly and full year results is available on its website: www.xlgroup.com (under “Investor Information – Financial Reports”).

XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis.

# # #

This press release contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about XL’s beliefs, plans or expectations, are forward-looking statements. These statements are based on current plans, estimates, and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: (a) the results of the reserve review and claims audits previously announced by XL and scheduled to be completed in the fourth quarter of 2003 (b) rate increases and improvements in terms and conditions may not be as large or sustainable as XL is currently projecting; (c) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than XL’s underwriting, reserving or investment practices anticipate based on historical experience or industry data; (d) developments in the world’s financial and capital markets which adversely affect the performance of XL’s investments and XL’s access to such markets; (e) changes in general economic conditions, including foreign currency exchange rates, inflation and other factors; and (f) the other factors set forth in XL’s most recent report on Form 10-K, Form 10-Q and XL’s other documents on file with the Securities and Exchange Commission. XL undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

                                 
                                  XL Capital Ltd
                       SUMMARY CONSOLIDATED FINANCIAL DATA

        (In thousands of U.S. dollars, except share and per share amounts)
                                   Three Months Ended      Nine Months Ended
                                      September 30            September 30
                                      (Unaudited)             (Unaudited)
                                     2003     2002 (a)       2003     2002 (a)
    Income Statement Data:
    Revenues:
    Gross premiums written -
     general, life and annuity
     and financial  operations $2,289,241  $2,647,732  $7,473,573  $6,990,665
    Net premiums written -
     general, life and annuity
     and financial operations   1,717,784   2,116,133   5,778,750   5,413,646

      Net premiums earned -
       general operations      $1,663,713  $1,344,681  $4,565,120  $3,391,880
      Net premiums earned -
       life and annuity
       operations                  86,428     786,383     249,681     836,073
      Net premiums earned -
       financial operations        35,307      16,917      98,087      42,284
      Net investment income -
       general operations         142,166     153,270     436,255     454,177
      Net investment income -
       life and annuity
       operations                  43,136      26,263     120,829      58,606
      Net investment income -
       financial operations         5,461       7,782      16,134      20,402
      Net realized (losses)
       gains on investments        (8,693)    (23,086)     80,331    (239,108)
      Net realized and
       unrealized (losses)
       gains on derivative
       instruments                (28,346)      9,484     (26,110)     (5,126)
      Equity in net income
       (loss) of investment
       affiliates                  26,240      (1,976)     87,344      38,140
      Fee and other income          3,920      10,082      25,989      38,490
                               $1,969,332  $2,329,800  $5,653,660  $4,635,818
    Expenses:
    Net losses and loss
     expenses incurred -
     general operations        $1,169,664    $828,199  $2,970,210  $2,289,568
    Claims and policy benefit
     reserves - life and
     annuity operations            99,954     803,741     302,737     870,320
    Net losses and loss
     expenses incurred -
     financial operations           3,894       6,006      26,177       9,032
    Acquisition costs and
     operating expenses           537,224     440,929   1,460,513   1,126,972
    Exchange gains                 (4,076)    (15,382)    (30,130)    (46,952)
    Interest expense               49,671      51,815     142,093     133,576
    Amortization of intangible
     assets                           375         875       1,125       1,500
                               $1,856,706  $2,116,183  $4,872,725  $4,384,016

    Income before minority
     interest, income tax
     expense and equity in net
     (income) loss of
     insurance and financial
     affiliates
                                 $112,626    $213,617    $780,935    $251,802
    Minority interest                 763       2,494       5,791       6,528
    Income tax expense             14,890      24,286      45,929      61,140
    Equity in net (income)
     loss of insurance and
     financial affiliates         (12,078)        401      12,487         (47)
    Net income                   $109,051    $186,436    $716,728    $184,181
    Preference dividend           (10,080)     (2,369)    (30,241)     (2,369)
    Net income available to
     ordinary shareholders        $98,971    $184,067    $686,487    $181,812

    Weighted average number of
     ordinary shares and
      ordinary share
       equivalents : Basic        136,826     135,790     136,744     135,551
      : Diluted                   138,423     137,349     138,170     137,291

    Per  Share Data:
      Net income available to
       ordinary shareholders        $0.71       $1.34       $4.97       $1.32

    Note:
    a) Certain reclassifications, which have no effect on net income, have
       been made to prior period  results to conform to current presentation.


                                 XL Capital Ltd
                       SUMMARY CONSOLIDATED FINANCIAL DATA

            (In thousands of U.S. dollars, except per share amounts)

                                   (Unaudited)

                                                  As at             As at
                                                 Sept.30,          Dec. 31,
                                                   2003             2002
    Balance Sheet Data:
    Total investments available for sale       $19,410,426       $16,059,733
    Net payable for investments purchased          112,219         1,546,276
    Cash and cash equivalents                    2,059,609         3,557,815
    Investments in affiliates                    1,855,989         1,750,005
    Intangible assets                            1,677,726         1,653,700
    Total assets                                39,586,850        35,647,369
    Unpaid losses and loss expenses             15,161,820        13,202,736
    Deposit liabilities and policy
     benefit reserves                            6,160,554         4,889,996
    Notes payable and debt                       1,898,959         1,877,957
    Total shareholders' equity                   7,401,210         6,569,589
    Book value per ordinary share                   $50.15            $44.48

XL Capital Ltd

RECONCILIATION

The following is a reconciliation of the Company’s net income to ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ for the three and nine months ended September 30, 2003 and 2002 (in millions except per share amounts):

                                 

                                          Three months ended Nine months ended
                                              September 30      September 30
                                              (Unaudited)       (Unaudited)
                                             2003     2002     2003     2002


    Net income available to ordinary
     shareholders                           $99.0   $184.1   $686.5   $181.8

    Net realized losses (gains) on
       investments, net of tax                7.3     28.0    (74.8)   245.8
    Net realized and unrealized losses on
     investment
       derivatives, net of tax               16.1      2.7      7.5     12.5
    Net realized and unrealized losses on
     credit derivatives,
       net of tax                             1.7      1.8     23.7     10.5

    Net income excluding net realized
     gains and losses on
       investments and net realized and
        unrealized gains and
       losses on credit and investment
        derivative instruments,
       net of tax                          $124.1   $216.6   $642.9   $450.6

    Per ordinary share results:

    Net income available to ordinary
     shareholders                           $0.71    $1.34    $4.97    $1.32

    Net income excluding net realized
     gains and losses on
       investments and net realized and
        unrealized gains and
       losses on credit and investment
        derivative instruments,
       net of tax                           $0.90    $1.58    $4.65    $3.28

    Weighted average ordinary shares
      outstanding:
    Basic                                   136.8    135.8    136.7    135.6
    Diluted                                 138.4    137.3    138.2    137.3

Comment on Regulation G

This press release contains the presentation of ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivatives, net of tax’. This presentation is a “non-GAAP financial measure” as defined in Regulation G. The reconciliation of such measure to net income (the most directly comparable GAAP financial measure) in accordance with Regulation G is included above.

XL presents its operations in the way it believes will be most meaningful and useful to investors, analysts, rating agencies and others who use XL’s financial information in evaluating XL’s performance. This presentation includes the use of ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivatives, net of tax’. Investment derivatives include all derivatives entered into by XL other than weather and energy and credit derivatives (discussed further below).

Although the investment of premiums to generate income (or loss) and realized capital gains (or losses) is an integral part of XL’s operations, the determination to realize capital gains (or losses) is independent of the underwriting process. In addition, under applicable GAAP accounting requirements, losses can be created as the result of other than temporary declines in value without actual realization. In this regard, certain users of XL’s financial information, including certain rating agencies, evaluate earnings before tax and capital gains to understand the profitability of the recurring sources of income without the effects of these two variables. Furthermore, these users believe that, for many companies, the timing of the realization of capital gains is largely opportunistic and are a function of economic and interest rate conditions. In addition, with respect to credit derivatives, because XL generally holds its financial guarantee contracts written in credit default derivative form to maturity, the net effects of the changes in fair value of these credit derivatives are excluded (similar with other companies in the financial guarantee business) as the changes in fair value each quarter are not indicative of underlying business performance of XL’s financial guarantee operations. Unlike these credit derivatives, XL’s weather and energy derivatives are actively traded (i.e, they are not held to maturity) and are, therefore, not excluded from net income as any gains or losses from this business are considered by management when evaluating and managing the underlying business.

In summary, XL evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income, XL believes that showing net income exclusive of the items mentioned above enables investors and other users of XL’s financial information to analyze XL’s performance in a manner similar to how management of XL analyzes performance. In this regard, XL believes that providing only a GAAP presentation of net income makes it much more difficult for users of XL’s financial information to evaluate XL’s underlying business. Also, as stated above, XL believes that the equity analysts and certain rating agencies who follow XL (and the insurance industry as a whole) exclude these items from their analyses for the same reasons and they request that XL provide this non-GAAP financial information on a regular basis.

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